Israeli troops raided the Khan Younis (search) refugee camp Friday in retaliation for recent Palestinian mortar attacks, killing eight Palestinians, including at least five gunmen, in the deadliest day of fighting since Yasser Arafat's (search) death last month.

Meanwhile, interim Palestinian leader Mahmoud Abbas (search) said Israeli Prime Minister Ariel Sharon's (search) hope of annexing West Bank settlements and keeping all of Jerusalem under a final peace deal is a disaster that could torpedo efforts to restart peace talks.

The fighting and Abbas comments came despite a rare feeling of optimism that has swept over the region since Arafat's death, with both Israelis and Palestinians calling for new negotiations to end their conflict.

Israeli officials have promised to help ensure upcoming Palestinian elections go smoothly, and Palestinian leaders have been working to persuade militants to halt attacks on Israel.

Israeli officials had also expressed support for a possible Middle East conference in Britain next year. An Israeli official, speaking Friday on condition of anonymity, said Israel did not plan to attend because the meeting would deal with Palestinian issues, including internal reform and increased donor funding.

In a major policy speech Thursday, Sharon said his plan to withdraw from Gaza next year, coupled with Arafat's death, could turn 2005 into a "year of great opportunity." He held out the prospect of an independent state for the Palestinians if they stop attacks.

But Sharon also reiterated his determination to hold onto some large West Bank settlements and all of Jerusalem in a final peace deal. The Palestinians want all the West Bank, Gaza and East Jerusalem for a future state.

In a telephone interview from the Gulf state of Qatar, Abbas called Sharon's comments a "disaster."

"If (Sharon) puts these conditions on the table and says that he wants to negotiate on this basis, then I think he's closing all the doors to peace," Abbas said.

Abbas said Israel must honor the internationally backed "road map" peace plan, which called for the creation of a Palestinian state next year. The plan stalled soon after it was signed in 2003 with neither side meeting its initial commitments.

"If the Israelis are ready to sit with us to negotiate implementing the road map, without any conditions, then we are ready to sit with them, because what we want is to implement the road map," Abbas said. "We will implement our part, and they should implement their part."

Abbas also called on U.S. President George W. Bush to pull back from his statement in April endorsing Israel's plan to hold onto parts of the West Bank in a final peace settlement and ruling out Palestinian refugees returning to Israel.

In recent days, Abbas has criticized the 4-year-old armed uprising against Israel, but he has not pulled back from the key Palestinian demand for a full Israeli withdrawal from lands it captured in the 1967 Mideast war.

Regardless, Abbas, a pragmatist, is seen as the candidate favored by Israel and the United States in the Jan. 9 elections to succeed Arafat.

An American monitoring team, including former U.S. President Jimmy Carter, will travel to the region to observe the vote, Deanna Congileo, a Carter spokeswoman, said Friday. The U.S. team will join a European Union observer mission.

In an effort to promote calm before the election, Israel has said it would not carry out raids against Palestinians unless attacked or about to be attacked.

On Friday, the army moved into the Khan Younis refugee camp in southern Gaza, following a week of mortar barrages and rocket attacks on nearby Israeli targets that killed a Thai worker in a Jewish settlement and injured 17 other people, including 11 soldiers.

"We entered (the camp) to distance the threat and catch those who are shooting," said the deputy commander of Gaza's Southern Brigade, Lt. Col. Dotan Razili.

Bulldozers and tanks knocked down buildings in the camp. Dozens of civilians took refuge in a local hospital, camping in the hallways and the lobby as an Israeli tank sat outside. Other families moved in with relatives, or spent the night at a local stadium.

On Friday night, an Israeli aircraft attacked a group of militants placing an explosive device, the army said. The attack killed one Hamas militant and wounded three other people, Palestinian officials said.

The fighting throughout the day killed eight Palestinians, including at least five militants, according to medical officials. At least 27 others were wounded, including an ambulance driver and five children under the age of 16, hospital officials said.

One Israeli soldier was wounded when Palestinians fired an anti-tank missile at forces in the area, the army said.

A weapons smuggling tunnel near Gaza's border with Egypt collapsed late Thursday, trapping six Palestinians, witnesses and officials said. Military officials said Palestinians told the army five bodies had been removed from the tunnel. Palestinian officials denied the report.

Despite the continuing violence, Sharon has said he still intends to withdraw from Gaza next year.

On Friday, Labor Party leader Shimon Peres agreed to bring his party into Sharon's minority coalition in the coming days, a move that would shore up the government ahead of the politically contentious withdrawal, Peres spokesman Yoram Dori said.

Final, minor details outlining the coalition agreement will be worked out between negotiators in a meeting Saturday, he said.

Sharon is expected to bring the coalition agreement for a vote in parliament Monday and swear in the Labor ministers later in the week, Israeli media reported.

A final Israeli Cabinet vote on the Gaza withdrawal was initially scheduled for June, and the three-month pullout was to begin July 3.

However, Sharon adviser Asaf Shariv said Friday that the final vote might be held several months earlier, to allow for possible legal challenges and practical preparations. The Maariv newspaper reported the vote could come as early as next month.